Some state companies find opportunity in growing market for legal cannabis

The rapidly growing marijuana industry — legal to some degree in much of the country — is providing a still-small but potentially fertile bed of opportunity for companies in Wisconsin and other states where the drug remains outlawed.

A few firms here have actively positioned themselves as suppliers to pot growers and processors, viewing the sector as a logical extension of markets they already serve.

And some are selling to marijuana companies — hundreds have sprouted in states such as Colorado and Washington — but don’t want to speak publicly about it.

In either case, they’re tapping a market with retail sales that have nearly doubled over the last two years, to somewhere between $2.7 billion and $3.1 billion in 2015, industry watcher Marijuana Business Daily estimates.

The online publication projects sales of up to $8 billion by 2019, and pot producers and retailers need all sorts of gear — high-intensity lamps, trimmers, environmental control equipment, shelving, safes and more.

Which means business for companies such as Cubic Designs Inc. in New Berlin, Madison’s Therma-Stor LLC and Roastar Inc. in Wausau.

Market could grow rapidly

The pot industry now represents just a small slice of sales at these firms, but if legal barriers continue to fall, the market likely will expand many times over. Marijuana Business Daily estimates that if recreational weed were legal nationally, it would generate $40 billion to $45 billion in sales annually.

Last year’s retail sales of beer in the United States, by way of comparison, totaled $107.7 billion, according to the Beer Institute.

“We just saw it as a big, significant opportunity for us,” Mike Mead, vice president of sales and marketing for Roastar, said of the company’s entry into the marijuana supply field.

It was a calculated move. The 48-employee firm already was making plastic bags for coffee, often imprinted with fancy designs. Turning out digitally printed, flexible pouches for goodies such as pot-infused chocolates — the company sells the bags under the Vessel Verde brand — wasn’t much different.

“It was products generally that we were already doing,” Mead said.

That’s true of Cubic Designs and Therma-Stor, too, but those firms didn’t consciously seek the market; it found them.

“We kind of stumbled into this,” said John Moore, vice president at Cubic.

The company, with 100 employees in New Berlin and at a factory in Waupaca, designs and builds mezzanine platform structures. Fitting together sort of like pieces of an erector set, the platforms multiply usable space in places such as high-ceiling warehouses, bottling plants — and now, marijuana grow rooms.

Some three years ago, a distributor contacted Cubic about building a large platform system in Colorado. Cubic had no idea who the project was for until the firm’s regional manager went to the site to take measurements and meet the customer, who turned out to be a grower of marijuana for medical use.

“And we’re like, ‘Oh, wow, that’s crazy,'” Moore said. “I mean, the shock factor was there.”

Unusual pattern of orders

Therma-Stor was in the dark even longer. The company’s line of dehumidifiers includes the Quest brand for commercial applications, and several years ago, the firm started getting orders from the West Coast in unusual patterns.

“They didn’t tell us too much about why,” Clif Tomasini, product manager for indoor gardening, said of the new customers. “They just said it was to grow plants. … They’d buy one unit and then they would call back and they would buy two units, and the next time they’d order a few more.”

Tomasini, a 12-year Therma-Stor employee with an MBA from the University of Wisconsin-Madison, was assigned to check things out. He did, and in early 2012 presented a business plan for systematically selling Quest to marijuana growers.

Now, after exhibiting at trade shows and knocking on lots of doors, Tomasini has made Quest a marijuana dehumidification player.

“I don’t know if we’re the leader, but we’ve been doing it the longest,” he said.

Cautious entry to market

Twenty-three states allow medical use of marijuana. Four of them — Colorado, Washington, Oregon and Alaska — also have legalized pot for recreation use, as has the District of Columbia.

But it remains illegal under federal law — largely unenforced in states such as Colorado — and controversial, which creates some sensitivity among companies dipping their toes in the market.

“We know that the subject is relatively taboo in some circles, so we were a little bit conservative in terms of how forward we wanted to be,” Mead said. Roastar’s approach: Create the separate Vessel Verde brand for its pot pouches, and thus seek to avoid alienating existing customers.

Cubic Designs wrestled with a more-unusual issue. Not long after landing its first order from a marijuana grower, the firm was acquired by a subsidiary of Berkshire Hathaway Inc., the holding company controlled by no less than Warren Buffett.

Several months later, after Cubic began marketing its platforms with mailers to about 1,000 marijuana-license applicants, Bloomberg Business wrote about the Buffett connection, which in turn spawned online posts suggesting that the legendary investor might be betting on pot.

That’s far-fetched. Berkshire Hathaway is a nearly $200 billion conglomerate with scores of subsidiaries employing more than 300,000 people, and is highly decentralized when it comes to managing the businesses it owns. But the affair was a cautionary tale for Cubic Designs.

The company’s immediate corporate parent, a Berkshire subsidiary called MiTek, advised the New Berlin firm to “be careful about who we’re talking to, where we’re advertising,” Cubic marketing manager Shannon Salchert said.

She said the company is remaining strictly in the business-to-business area of the market and making sure “we’re being professional about how we are portraying ourselves.”

Colorado real estate boom

Colorado offers an indication of the potential economic effects of legalized pot. The pioneer in recreational marijuana, with sales beginning two years ago and with medical marijuana legal for more than a decade, the industry has sparked a real-estate boomlet.

Marijuana cultivation occupies at least 3.7 million square feet of industrial space in metropolitan Denver — the equivalent of 20 Walmart Supercenters — commercial real estate firm CBRE Group Inc. said in a research report in September. From 2009 to 2014, the marijuana industry took nearly 36% of industrial space that became available, the report said.

Imagine if more states follow in Colorado’s footsteps.

“There are going to be more and more growers as the laws allow them to do this, building more facilities, which are going to need more mezzanines,” Moore said.

Mead has his eye on the possibilities, too. Much will depend on legislation, he said, but the indicators so far suggest “that cannabis is going to be a key market for us.”

Tomasini sounds a more-cautious note. Yes, broader legalization could spawn more grow rooms waiting to be fitted with Quest dehumidifiers that help pot farmers control conditions so their precious plants can flourish.

But Tomasini also can see another possibility.

“There is a chance that a fully legal market is an outdoor crop, and that’s not very good for us,” he said.

Beyond such considerations is the very big question of what the government will do going forward.

While marijuana remains illegal under federal law, the U.S. Department of Justice has taken a hands-off approach to medical use, and given states wide latitude to enforce their own policies on recreational pot. In an August 2013 memo, issued after voters in Colorado and Washington made their states the first to legalize recreational marijuana, the department said it was “deferring its right to challenge their legalization laws at this time.”

Could that policy change under a new administration?

Robert Mikos, a law professor at Vanderbilt University and a scholar on drug law, doubts it. Rather, he thinks there will be a slow, state-by-state march toward wider legalization.

“The writing is sort of on the wall,” he said.

But the Justice Department isn’t the only agency affecting the fortunes of marijuana growers and, ultimately, their suppliers. While the Justice Department may not enforce federal law in states with legalized pot, the Internal Revenue Service in effect treats marijuana sellers there like criminal drug traffickers, said Jordan Cornelius, a certified public accountant in Denver.

Using a provision of the tax code enacted in the 1980s, the IRS doesn’t allow marijuana firms the ordinary deductions taken by other businesses, raising their effective tax rates to astronomical levels, Cornelius said.

So while the industry’s revenue numbers may be soaring, many small and medium-sized operators are making little money, and that will remain a major issue unless the IRS policy is overturned in the courts or by Congress, he said.

“Until that happens,” Cornelius said, “I don’t think you’ll ever see the true potential of the marijuana industry in Colorado … or anywhere.”